Why would Foxconn buy Sharp? It’s all about the iPhone

Japanese electronics maker Sharp has accepted a bid from Taiwan’s Foxconn Technology Group for it to buy a majority stake in company for ¥489 billion ($4.4 billion), the Japanese firm announced today (Feb. 25). Shortly thereafter, however, Foxconn put the deal on hold ”after receiving new material information from Sharp,” it said in a statement.

“We will have to postpone any signing of a definitive agreement until we have arrived at a satisfactory understanding and resolution of the situation,” Foxconn added. Is this a negotiating tactic or a sign that the purported takeover—a bailout, really, given the deep discount offered to Foxconn—has already unravelled? No immediate answer was forthcoming from the companies, but sources told the Wall Street Journal (paywall) that large contingent liabilities at Sharp—worth perhaps billions of dollars—only recently came to light, spooking Foxconn execs. Including debt, the deal could be worth some ¥700 billion overall.

The transaction has been years in the making, with the earliest failed takeover dating back to 2012. Its apparent completion has brought about some controversy in Japan, where foreign acquisitions of domestic tech firms remain unpopular. If it goes through, the deal would mark a key win for both Apple and Foxconn.

Foxconn assembles the iPhone—Apple’s best-selling product and the world’s most profitable smartphone—and also manufactures some of its components. These are goods and services it sells to Apple as part of its “bill of materials.”

The crown jewel in that bill is the screen—by far the most expensive part of an iPhone.

Foxconn doesn’t make displays. But Sharp does. So do LG, Samsung, and other electronics companies, some of whom make Android devices that compete with the iPhone.

By acquiring Sharp, Foxconn could earn an even larger portion of the overall bill of materials for the iPhone. Apple would also benefit from the deal because it could buy iPhone screens from a partner, rather than a competitor like LG, from whom it currently buys screens. It might also be able to buy the displays for less than what LG or Samsung would charge for them, because of bulk purchasing benefits from Foxconn.

This could ultimately make the iPhone much cheaper to make—though not necessarily cheaper to buy. Apple won’t necessarily pass along the savings to its relatively price-insensitive customers.